One of the biggest growth narratives this decade has been the rapid expansion, urbanization and digitization of China’s economy. Put simply, China’s middle class has rapidly expanded over the past several years. That growing middle class has simultaneously urbanized and digitized, creating a surge in demand for internet services and products, which has propelled China’s digital economy to grow by leaps and bounds.
A big part of this China internet growth narrative has been digital advertising. China’s digital ad market has fired off 20%-plus growth year after 20%-plus growth year over the past several years, and the digital ad market has grown from a fraction of the total media landscape to account for the lion’s share of media ad spend today. In 2018, digital ad spend represented 65% of total media ad spend in China. In the United States, digital ad share is below 50%.
Thus, China’s digital ad market has not only grown significantly over the past several years, but it has actually become more dominant than America’s digital ad market.
But, at a 65% penetration rate and against the backdrop of economic weakness throughout China, cracks have started to form in China’s digital ad market. Cracks may actually be an understatement here. While eMarketer is calling for another 20%-plus growth year in China’s digital ad market, many Chinese digital ad players have been reporting flat growth in early 2019.
The result? Multiple Chinese ad stocks have been in sell-off mode.
Is this the end of the Chinese digital ad growth narrative? Which stocks have been impacted? Will they continue to head lower? Let’s answer those questions by taking a looking at six Chinese ad stocks to sell after suffering from this slowdown.
% Off Highs: 60%
YTD Return: -28%
At the top of this list is one of China’s most important and biggest digital ad players, Baidu (NASDAQ:BIDU).
For all intents and purposes, Baidu is the Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) of China, as the company is behind China’s most widely used internet search engine and has built a very big digital ad business on top of that search engine. But, that digital ad business has come to a screeching halt over the past few quarters. A year ago, Baidu’s online marketing business grew revenues at a 23% year-over-year rate. Last quarter, the online marketing business reported just 3% year-over-year revenue growth.
The slowdown has nothing to do with lower usage. Daily active users of Baidu App rose nearly 30% in the quarter. Instead, the slowdown has everything to do with China’s digital ad market slowing as China’s economy has likewise slowed over the past several quarters. So long as this broader economic slowdown persists, which it will so long as trade tensions hang around, then China’s digital ad market will continue to slow, too, as will Baidu’s core advertising business.
To be sure, there are other growth levers here that Baidu can pull and is pulling to keep revenue growth respectable, including smart home, cloud and streaming. But, until the core ad business gets back on track, BIDU stock won’t bounce back.
% Off Highs: 70%
YTD Return: -25%
Once one of China’s highest flying digital ad stocks, Weibo (NASDAQ:WB) has since turned into one of China’s worst performing U.S. listed stocks.
Much like Baidu is the Alphabet of China, Weibo is the Twitter (NYSE:TWTR) of China. The company operates a micro-blogging social network site that hundreds of millions of Chinese consumers use every day to communicate short messages and sentiment with the public. The Chinese consumer loves the platform. Monthly active users on Weibo have consistently grown at a double-digit pace for the past several years, and the platform now features 465 million monthly active users.
That’s a big number. But, the problem here is that Weibo is struggling to fully monetize those 465 million users. A year ago, Weibo’s advertising business was growing at a near 80% clip. Last quarter, the ad business grew by just 13%. That’s a huge slowdown, and it is largely why WB stock has fallen 70% off its all-time highs over the past several quarters.
Long term, the upside potential in WB stock is compelling here. The company’s market cap per user is tiny, and if it can figure out how to monetize its huge user, the stock will head tremendously higher. But, until those ad growth rates turn around, that big recovery rally will be put on hold.
% Off Highs: 87%
YTD Return: -22%
Another large Chinese advertiser that has struggled in early 2019 is Sohu (NASDAQ:SOHU).
At a high level, Sohu provides online media, search and game services in China, and makes most of its money through throwing ads on those various services. At one point in time, those digital ad businesses were firing on all cylinders. A year ago, the company’s revenue growth rate was 22%, led by search advertising revenue growth of 55%.
That growth has since evaporated. Last quarter, revenues were down 5% year-over-year, as the search ad business decelerated to just 6% year-over-year revenue growth. As the growth rates have come down, so has SOHU stock, which now sits nearly 90% off its all time highs.
The rebound thesis here is less compelling. The digital ad market in China is slowing, and when growth markets slow, the lower hanging fruit tend to be hit the hardest. Some don’t make it through the slowdown. Sohu is one of those lower hanging fruits. Thus, the bull thesis here lacks conviction.
% Off Highs: 33%
YTD Return: 3%
One of China’s largest digital advertisers is Tencent (OTCMKTS:TCEHY), and while TCEHY stock has favored better than its digital ad peers lately, the stock has not been immune to the digital ad slowdown.
Tencent is at the epicenter of China’s digital economy, operating the company’s largest social networks, streaming platforms, online gaming websites and payment apps, among other things. Through its various services, Tencent employs various business models, and generates revenue from various sources. One of those sources is digital advertising. But, the digital ad business isn’t a huge component of Tencent. Last quarter, online ads accounted for less than 16% of total revenues.
A year ago, that digital ad business was growing at a 55% rate. Last quarter, it grew at just a 25% rate. That’s a big slowdown. But, because the digital ad business is just one piece of the pie at Tencent, the company has been able to better weather that digital ad slowdown than its peers. Further, at 25% growth, Tencent’s digital ad business is still doing pretty well.
Overall, TCEHY stock looks like one of the best China ad stocks to buy on weakness. This company’s ad business is still growing at an impressive 20%-plus rate, and revenue diversity limits Tencent’s exposure to further weakness in the digital ad market.
% Off Highs: 34%
YTD Return: -4%
A smaller yet still important Chinese advertiser that has struggled over the past few quarters is Bilibili (NASDAQ:BILI).
Bilibili operates a hyper-growth video sharing platform in China that has over 100 million monthly active users, and is growing that user base at a robust 30%-plus rate. The company monetizes that platform through mobile games, live broadcasting, and advertising. All three of those businesses are growing at 25%-plus rates, and the company’s total revenue growth rate last quarter was just a hair under 60%. Yet, BILI stock is down 4% year-to-date, and currently trades more than 30% off its all time highs.
Why the weakness despite the big growth numbers? Those big growth numbers are less big than they used to be. Over the past four quarters, user growth has dropped from 35% to 31%, and revenue growth has dropped from 105% to 58%. Mobile game revenue growth has dropped from 97% to 27%, and advertising revenue growth has dropped from 144% to 60%.
In other words, a broad growth slowdown has led to a demise in BILI stock. But, this company is still in a class of its own when it comes to growth in China’s digital economy, and Bilibili is still rapidly gaining share. Thus, the rebound narrative here actually looks pretty good. So long as this company can maintain strong user and revenue growth rates, near-term weakness will pass and the stock will ultimately head higher.
% Off Highs: 30%
YTD Return: 10%
One of the biggest players in the Chinese digital ad landscape is Alibaba (NYSE:BABA).
Better known for its e-commerce platform, Alibaba nonetheless operates one of the largest digital ad businesses in all of China. Those two businesses, and Alibaba’s cloud business, have been holding up nicely against the backdrop of an economic slowdown in China. Alibaba’s overall revenue growth rates have largely remained north of 50%.
Still, BABA stock trades nearly 30% off its all-time highs because investors are concerned that, eventually, slowing economic expansion in China will catch up to Alibaba, and that the company’s e-commerce, ad and cloud businesses will all slow.
This could happen. But, it’s not happening yet, and it is happening almost everywhere else. Thus, Alibaba has shown impressive resilience which, if sustainable, implies that fears related to a growth slowdown here are overstated. If those fears prove to be overstated, BABA stock will bounce back in a big way from recent weakness.
As of this writing, Luke Lango was long GOOG, WB, TWTR, TCEHY and BABA.